世邦魏理仕集團 (CBRE) 2003 Q3 法說會逐字稿

Welcome to Trammell Crow's third quarter conference call. All participants will be able to listen only until the question-and-answer session of the call. This call is being recorded, if you have any objections you may disconnect at any time. Ms. Bower, you may begin.

Good morning. Thank you for joining us for Trammell Crow Companies third quarter 2003 earnings release conference call. This morning we faxed each of you the company's press release. If there's anyone on the line who needs a copy of that release, please call 214-863-3-3350, and we'll fax you one immediately. This call is being web cast live. It will be archived and available through November 18th. The call may be accessed from the investor relation section of our website at www.trammellcrow.com. In just a moment, Trammell Crow's management will provide commentary on the earnings and then open the line for Q&A. First I would like to remind you that comments made during the call may contain certain forward-looking statements. Actual results and the timing of certain events could differ materially from those projected and/or contemplated by the forward-looking statements due to a number of factors, including those set forth in the form10-K as filed with the SEC. With that I will turn the call own to Bob Sulentic, our chairman and CEO.

Thank you Barbara and Good Morning everyone. With me here today are Derek McClain, our Chief Financial Officer, Arlen Gaffner our CAO, Bill Concannon our Vice Chairman, John Stirek, and Mike Lafitte, President of our global services businesses. Also with us on the line of Jim Grosh and Chris Roth, President of our eastern development and investment business calling in. Before we get into the operating results for the quarter and some information on our operations, Derek, you want to take us through the financial results?

Sure. I'll focus on the third quarter and year to date results and outlook for the remainder of the year. First, briefly on a consolidated basis and then in more details for each of the segments, understanding the performance of the segments is key to understanding the consolidated results. Diluted earnings per share for the quarter were five cents. When we reported our second quarter results, we gave guidance that we expected our third quarter to produce earnings per share shy of but approaching the ten cents reported in last years third quarter. The short fall versus our expectations is attributable to transaction slippage. As we noted in our release this morning however despite this shortfall, we are cautiously optimistic regarding our ability to finish the year with earnings per share in the range we've been targeting all year, up 10-20% from last years $0.45, we are tracking identified transaction with profit contributions to get us there. There's of course timing and execution risks with those transactions, but we're working the deals with all the appropriate diligence. Turning next to global services, global services third quarter results were impacted by transaction slippage, as I've noted, but it's important to note some very encouraging things about the segments performance.

On reduced revenue, the segment still posted third quarter income before tax of $5.8 million, slightly ahead of last year's third quarter number and on a year to date basis, global services income before taxes was up 42%, and the segment's EBITDA is up 11%. Segment revenues were down for the quarter and year to date with the decline in each period due entirely to a decline in facilities management revenues. FM revenues were down as expected, primary due to our exiting unprofitable business in 2002, I know that's old news, and I'm about done talking about it, but it's still relevant as it affects our quarter-to-quarter historical comparisons. Brokerage revenues were up slightly for the quarter and year to date as corporate advisory services [inaudible] have increased by more than the amount of decline in institutional brokerage revenues, which consists of investment sales and project leasing. We are targeting significant fourth quarter 2003 increases in tenant rep and investment sales revenue and a more modest increase in project leasing revenue. That's on the basis of identified transactions. Property management revenues were up slightly from third quarter of '02 to the third quarter of 2003. They're still slightly behind last year on year-to-date basis and that reflects the impact of having our phase-in mall management business in the numbers for part of last year. Corporate project management revenues were up nicely, 13% from quarter to quarter, and they were fueled by growth with two large corporate customers. Then finally, for both the third quarter and the year to date, we posted modest increases in construction management.

Next, development and investment, development and investment results were also impacted modestly by transaction slippage, but really as we noted in our second quarter earnings release, the story here is the fourth quarter. We've all along expected that almost all of our significant second half of the year closings would occur in the fourth quarter and that's still what we're expecting. While the segment has reported a third quarter and year to date loss due to reductions in the amount of gain on sale, we still are targeting significant income before tax from the segment for the full year. Then, finally, just a few words about our balance sheet. From June 30 to September 30, we've had a further increase in our cash balance of $7.5 million. With our line of credit borrowings flat at $10 million. The FASB 144 and the continual re-classes of real estate and related debt on our balance sheet make these portions of the balance sheet hard to follow, but we'll be glad to take your questions either on the call or afterwards about any of those balances. The bottom line on our balance sheet is that we think it's strength will afford us plenty of flexible on executing our strategy going forward.

Thanks, Derek, I'm going to make a handful of comments giving my observations on the business and where it stands, and then can Mike Lafitte and John Stirek will give you more details on the services and development business, respectively. I'll start with my view of the earnings. As Derek mentioned, we remain optimistic about the targets we set for the year, even though there was some slippage in the third quarter. In my view, it doesn’t change our prospects at all it's all about timing, what happened in the third quarter, so we remain cautiously optimistic for the year. But more importantly, the underlying activity in our business is very, very positive and different than it's been over the last couple years. I mentioned to you last quarter that we were going to comment when we talked this quarter about our customer survey feedback, and Kingsley and associates, who reviews this independently each year reported to our independent board of directors in September about those results and they were up materially over a year ago, so that was very encouraging. Our brokerage and project management revenues are up for the year. That's important, I think, because we're only now starting to see the market turn, so we started to see some upward movement in those parts of the business ahead of the economy improving, and we think we're on the cusp of the economy getting better now which should put some wind at our back.

We've added a great group of new producers in our brokerage business and we've added several key leaders around the system all of this cost us in the short run and in fact had an impact on the earnings, and will have an impact on our earnings again next year, but the pricing we can get to add new people in the market at this point is very positive, and it will be a big plus for our future. We've landed several new pieces of corporate business, and we got the biggest pipeline of corporate activity we had in at least two years, our development profits are down as expected, but that business is very well risk-mitigated which at this point in the cycle is our top priority for the development business. The levels and the makeup of our new pursuit activity is very positive. John Stirek will give you more than that, but the trend is upward for the first time in some time in our development pursuits. We've also made very good progress toward the next round the capital markets program for development and investment business. John will give you more on that as well. So with that I'll turn it over to Mike to give us detail on the services business.

Thank you, Bob. This has been an active quarter for global services sector with significant activities taking place in various leadership roles within our divisions as well as within our brokerage growth initiatives. In addition to our stated goals of customer service and operational excellence, we have continued to focus on margins, and on new opportunities. I will comment this morning on the following primary themes. First people and brokerage, second customers, third comments on each of our business lines, and then finally growth. To people, we have continued to actively seek, as Bob has mentioned, and hire very strong talent in all areas of our business within global services. Specifically in the area of brokerage, we recently announced [inaudible] joining our company’s our new brokerage leader overall for the company. He brings 20 years of experience in this business and has already proven to be a great leader for the company. Additionally we're proud to announce Jack Minter (ph) has agreed to join the company as our investment services leader for the company. He comes with a wealth of experience in the capital markets and will be our functional leader for this business line for global services. Additionally, we have continued to invest and make regional brokerage hires throughout our network. Specifically we've made significant improvements in this quarter in southern California, Atlanta and Chicago.

Our head count as we report quarterly is now at 531 in our network, which is up from 500 at the beginning of the year and we still believe we're on target, which we have -- to achieve our 10% growth in the head count in the U.S. Additionally, this quarter we announced a significant alliance with J.J. Barnekey (ph), Canadian based brokerage company, this alliance provides exclusive transaction services between Canada, between Barnekey and the Trammell Crow Company. J.J.Barnekey has a broad network in Canada of 260 brokers, and as we continue to commit to our brokerage line of business, this is a significant win for the Trammell Crow. We're also seeing significant activity back and forth between our brokers and the brokers within J.J. Branakey.. Other leadership positions and appointments include Jim Hayden. We have announced as the head of all our corporate business development. This shows further commitment to our outsourcing business and our corporate customers. We have centralized this function with additional senior leaders aimed at new business in the corporate sector. Additionally Alex Dera (ph) has been recently announced as the head of our international region for the company overseeing all of our business outside of the United States. Peter Cain has recently joined Trammell Crow Company as the alliance director of the American Express account and we have announced George Cole as a new leader for the Chicago trade business.

All of these, as well as others throughout various business units are significant wins that we have been able to attract great talent to this company. As it relates to our customers, as Bob and Derek both have mentioned some of the wins that we have announced in the quarter include Tyco, which was a transaction management win for 44 million square feet. In the U.S. and in Canada. We previously announced a win with RMH for facilities management services within Canada. Numerous investor customer wins in Phoenix, Memphis, Seattle, southern California and Baltimore with significant customers. Bob also mentioned our customer satisfaction surveys that we have recently completed. I just wanted to make a couple comments on the findings. Basically there were three or four main things we found from this independent third part research firm-- number one, Trammell Crow Company client satisfaction has increased while that of our competitors has declined. Number two Trammell Crow investments in our initiatives around best practices, our national accounts team and our client focus has been successful and is showing evidence of having impact on client satisfaction in a positive way. Third, Trammell Crow Company client focus is evident to our customers and was mentioned often as a competitive advantage for the company. And finally while the global services delivery is not perfect by any stretch, our overall results were very favorable and help confirm our spoken commitment to customer satisfaction.

So we're pleased with the results. I'll make a few comments by business line on our quarter and year-to-date results. On the corporate side of our business, as Derek mentioned, our facilities management revenues are down for the quarter and for the year. Gross margins, however, are up year to date as we have focused on more profitable business, so we're encouraged by our disciplines that are having an impact there, and our CAS, or corporate advisory services revenues are up both year to date and for the quarter. We obviously increased our head count as well as one new national business with the likes of Tyco and other wins we have announced this year. On the corporate project management side, again revenues are up for the year and for the quarter. We continue to add people resources around this line of business and post wins with new customers and are expanding this work with our existing customer base. On the institutional side of our business, property management revenues are down slightly for the year, but up for the quarter. Lower rents, property vacancies and tough markets are putting pressure on this line of business.

Trammell Crow has continued to have a high focus on our office sector within this line of business, as we changed the mix of our property management business, we still have a substantial portfolio in the industrial sector and a reasonable portfolio of retail. The brokerage lines of business for institutional both project leasing and investment services are both down approximately 10% year to date as compared to 2002. Similar factors here for project leasing, as affect the property line of business. Investment services, however, is very seasonal, and we still expect to have a very busy and active fourth quarter. The institutional construction management business is up for the year and for the quarter, but it's not nearly as large as a segment as our corporate project management business. My final comments will just focus around our positioning global services for growth. I've really got seven things here that I think position us very well for growth going forward. Number one is our brokerage expansion. We've said this for the last year in terms of our focus on growing this line of business, and we are committed to doing that.

Second is our dedicated teams focused on new opportunities in the corporate and outsourcing business which makes up over 60% of our revenue of global services, as well as focused teams on investor and healthcare business, so these pursuit teams are very well organized. Third is our experienced national accounts team and focus on our existing customer base, our best practices and delivery of solutions for all of our customers. Fourth is a focus on growth of our major U.S. markets, specifically we will continue to focus on New York City, Chicago, and southern California. Fifth is our focus on office building business for property management leasing domestically as well as an increased focus on investment services business for all of our investor customers. Sixth is our international business expansion and our realignment with Alex Dera for our work in the UK and Canada and throughout Asia. Finally it's our continued focus on margins within each line of our business. We will continue the disciplines around both pricing and contracting. Overall we're focused on the future and have put in place the people and the platform that should enable us to grow. Bob.

John, do you want to give us an overview of the development investment business.

That's great. I'll comment on the development investment business where our third quarter results were generally consistent with the expectations, despite a loss for the quarter and the year to date loss, that is in line with expectations, and frankly we're not really down about that, and as we've stated, we are tracking all the transactions in the fourth quarter, and we fully expect it still to make a significant profit contribution from the development investment business for the year. That profitability will be less than what it was last year, but that's frankly as expected, and probably what it should be. The reality is our transactions have a 24 to 36-month cycle to them, and so our pipeline is down, and our in-process activity is down. This is consistent with the decrease of economic activity the last couple years, plus we really feel it's appropriate. You make your biggest mistakes and I think you lose the most amount of money for big bets you make at the bottom of the cycle. I think we were both prudent and fortunate to pull back at the time we did.

I would say we're not down about where we're at on kind year-to-date results. I had would say looking forward we're very optimistic. I'll give you four reasons why we fundamentally think we are in great shape. First of all, we are at the bottom of the cycle, and we're headed up. Our network is intact with great people and we are continuing to attract great people as necessary. We've never been in as good a shape in our network with the opportunities in front of us right now coming out at this point in the cycle as we have in prior years and for the first time in mine and Chris', my partner Chris' career in 40-plus years of it, we'll remain profitable all the way through the down cycle. That's the first time we can say that. If the 40-plus years ages Chris and I, I'd like to point out that Chris has contributed a couple more years in that whole total. Sorry, Chris. Second reason we are optimistic is our investment activity levels are up versus last year. Internally, we have investment committee on any deals that require greater than a $250,000 capital appropriation. So through the third quarter of '02 we had 15 investment committee approvals versus this year at this time, third quarter '3. We had 21 year-to-date approvals.

Not only are there more approvals going on, but also that is accelerating. We've seen more activity here in the third quarter than we did prior. I can assure you we have not changed our underwriting and mitigation criteria we've applied. That's been exactly consistent throughout there. That investment committee is the harbinger of refilling our pipeline and we're seeing increased activity there. So that's a very big positive. Third area that we are excited about is we continue to get excellent traction on our initiatives. Mainly those are healthcare, higher Ed, [inaudible] suits, airports and mixed-use. The most telling statistic I can give you is third quarter of '02 47% of our dollar starts at that time were initiative-based, in the third quarter through '03, 76% of our dollar starts were initiative-based. A meaningful jump. The initiatives is what's enabled you to remain profitable through the down cycle. When the supply-side business comes back, our intent is to have both this initiative business and the supply business hitting at the same time, and we really think this will create a meaningful margin and profit leverage for our entire network. The fourth area I think we're making real progress is in the capital initiatives front.

There we're focused in three areas, the medical office building healthcare sector, the industrial sector and opportunistic acquisitions. We have a very senior development investment team really dedicated towards making these happen. When we think back to 1997 when we put our initial customer programs in place, we had our best development investment results in '99 and 2000. So we anticipate making progress on these, having a meaningful capital alignment, and we think this will position us well for the supply-side recovery in addition on our initiative recovery and that will be the up side over the long run here. In conclusion, I would just remind everyone the development investment business is not a quarter-to-quarter business. Its clearly the least short term of our service lines. In fact it's a cycle to cycle business. So on the surface, you know, the quarterly business would look like we're 0-3, and we really don't feel that way. We actually feel we're kind of right where we want to be. We're going to have a big fourth quarter and we're headed for some meaningful wins for the long season.

Okay. Thanks, John. Why don't we go ahead and open it up for questions and answers.

Thank you at this time. We're ready to begin the question-and-answer session. If you would like to ask a question, press star-1 on your Touch-Tone phone. You will be announced. To withdraw your question, press star-2. Again, to ask a question, please press star-1. Our first question comes from Mr. Will Marks, JMP securities. You may ask your question.

The question on -- for Mike, I guess, on brokerage, I'm trying to get a sense of what happens during the early stage of a recovery? You know, what happened last time around, could next year see you know, 10% to 20% growth on a same-store basis? I understand you've added brokers, but if you look at each particular broker on same-broker basis, are brokers positioned to increase their revenues by X percent?

I'll make a couple comments and Derek may want to jump in as well and give whatever visibility you want to give. Clearly we have seen average production per broker come down. The industry has seen that, probably to the tune of 20% to 30% from the peak. What an average typical producing broker within our company would be grossing in production, in 2003, compared to 2000, and 2001. Production per head has clearly come down as the cycle has come down. When the commissions are a factor of rents, that has an impact on productivity. As markets recover, clearly expectations would be that, you know, the average production per broker can go up merely by market dynamics, but in addition it can go up by recruiting more senior talent. There is typically a lag. When you actually start to get the benefit of headcount increases, you know it's not unusual for there to be 12-month lag for getting production from a broker. If you're starting from scratch, or if that broker is moving from one company to another, generally there is a lag in terms of when that production will start to take place. Clearly we are still projecting revenues in our brokerage line higher this year than they were last year, and we would certainly expect that trend to happen again. We are early in -- or midway in our business planning for 2004, but our commitment to continue to grow brokerage in our head count will continue into 2004. I can tell you that.

I don't have much to add to that. I think really it's all about average production per broker. As you noted, Mike, it's down significantly from peak levels in '99 and 2000, and, you know, really, you know, how fast it can go back up and where it can get to is just a function of, you know, when and how much the economy's going to heat up. But a -- and, again, I don't have the numbers in front of me. If it's 20% to 30%, I would think it's at least that decline in production per broker from the peak to today, that's a much, much, much bigger impact on profit than revenue. So it could fuel us nicely if we can get that wind at our back that Bob referred to.

Mike, if I could just add to that, because I think the focus of Will's question is production per broker. There's a couple other things, Will, that I think will factor into that as we move forward. Obviously an up tick in the economy would help a lot for all brokers, but one of the things we've done that will help us in that regard, Mike talks about the net increase we have in brokers, but if you look at what happened, that net increase is the product of a much bigger gross edition of brokers, and cycling out of some that were less productive. So I think that will have an impact. Secondly, all of this work we're doing with our corporate pursuit teams, much more focus, much more aggressive than in the past to help us land one-off transactions with those corporate customers, but also to help us land big accounts with them to do big chunks of their work around the system. Which is additive to the production of our individual brokers. So I think that will –be a few dynamics that is going to help us

I would add there's clearly a connection between our focus on adding corporate advisory services brokers and our outsourcing business. The growth plans are connected as we win more corporate outsourcing work, our network will be deeper to serve those customers.

Let me ask you one question that just results to how I'm modeling that. Would you look at your commission line of expenses relating to both the brokerage and the corporate advisory services line?

Absolutely, Will. You'll note the tick up in commission expense there on, you know, revenues that are really flat for the two brokerage lines combined is due to a change in the mix of that brokerage. You can see that corporate advisory services or tenant rep business for both the quarter and year to date is up by approximately the amount that the institutional pieces are down. And, you know, generally in terms of commission splits on the project leasing piece of the institutional brokerage line, we're paying out lower splits on that business than we are the tenant rep business, so the change in the mix has impacted that commission line.

We may want to look at it that way going forward. Obviously it's positive and you're getting more corporate advisory business, but we should assume a little lower margin in the future or continued pressure on the margins?

If you want to track those commissions as a percentage of that -- that commission expense as a percentage of total brokerage revenues, the two lines combined, you can kind of look backwards and see as the mix shifts, that percentage shifts within a fairly narrow band, but it does have some impact.

But I wouldn't -- the commission percentage may go up as the volumes go up, but there's substantial fixed cost in that business, so you would still -- the increase in commission percentage relative to commission revenue dollar is not as nearly as big as the gains we make as that flat item grows, and the fixed cost becomes a diminished percentage of the total revenues.

Once again, to ask a question, press star-1. Mr. Will Marks of JMP securities you may ask a question.

I was waiting to see if anyone else wanted to take the floor, but I will ask another question. I don't want to take too much of your time, but on the same thing in terms of looking ahead during a cycle, in property management, how should we view that? I know I've asked this before, but I guess I don't have a great understanding of when things turn and let's say there's a first year of recovery, 10% growth, does property management tend to lag a bit, because it hasn't declined as much?

Well, there's a couple factors that obviously affect that line of business. One is rent. I would be pretty conservative. Certainly our view of the rent recovery with the condition of the vacancies that are out there, I think that's a slow climb. I don't think there's any sector that will spike anytime real soon. Our ability to win more business there will be very tied to also adding brokers. I can tell you when we have a stronger network we've seen evidence of that in places like Phoenix where we've added significant new talent to our company and have been able to dramatically impact that line. So I think we clearly view it as a slower growth line of business than we viewed the corporate side of our business, a slower steady growth line of business, but the rent side of it certainly has an impact as well as our ability to put up new wins.

The other factor at work there is, as Mike mentioned in his opening comments is the shift in the product mix as well. We're focused on growing our office property management portfolio, and that is clearly a much more lucrative business than, say, the industrial stuff we do, and we're very focused on making market share gains in office property management.

One other question. I can't recall, have you given any EBITDA guidance for the year? Can we look at the 10% to 20% EPS growth as also tying into the EBITDA?

Probably with -- I mean, you're right, we haven't given any guidance. Hang on a sec here. It's not a big change. I would say you shouldn't translate 10% to 20% growth in EBITD to 10 to 20% growth EBITDA.

So it's probably not quite as great as 10% to 20% growth?

Right.

And final question, I haven't heard anything on the balance sheet except it's clearly improved over time. What is your strategy going forward? You got good cash flow, Would your stocks run up? Would you purchase stock at this price? We're getting near the price where you last issued stock, given it's been five years or so but what are you thinking going forward?

I would tell you, kind of the last piece of John Stirek's remarks were focused on the progress we're making on capital programs, and we're hopefully on the verge of actually getting those pulled together, and those will involve some co investment by Trammell Crow Company, in addition to our Capital Partners contribution. So that will take some of our capitals. And we'll see how those play out and then consider the other things you mentioned.

Well, the other thing about using our capital to repurchase shares, we've done some of that, as you know, and we do it when we think it's a good buy, and we don't want to do it, though, in doses that are too large, because while our stock has been the good buy and we still think it's a good buy, that's a good financial engineering play, but it doesn't change our company operationally or strategically make it better, land new accounts, so on and so forth. We think we're just now coming into a period of time where there will be a lot of opportunities for us to invest cautiously invest in good offensive things. There's all kinds of people out there in the marketplace that are extremely capable professionals that we can bring into the company, and a lot of that activity requires capital. Unfortunately, in the short run, it tends to hit the income statement. There's the activity that John and Derek talked about on the capital programs, and there's a, as I said a few minutes ago, there's a pipeline of corporate business that's larger than we've had in some time, and often those accounts involved some investment, and we expect some of that investment to make in the not-too-distant future. So we're thinking there will be exactly the kind of opportunities to invest in our business that our shareholders have been wanting us to have. They've been wanting us to buy back shares only in the absence of those opportunities. So we're hoping those opportunities are there.

Great. Okay. Thank you very much.

Our next question comes from Mr. Bill Baldwin from Baldwin Anthony Securities. You may ask your question.

Good morning, gentlemen. John, is it possible to be somewhat specific on the time line as regards the capital initiatives that you're working on, particularly as regards the medical office buildings and the ware house properties?

I'll be as specific as I can be. You know, we are working with various capital partners in the alignment on that. We don't anticipate having that done by year-end this year, but we hope sometime next year and preferably the early part of next year that we would have that alignment down and be able to announce that. So that's our projected timing.

Are you perhaps looking for one or both of those projects to be in the form of establishing a REIT that Trammell itself would be the manager of?

It would not be a public REIT on those. What we generally do with our partners is we co-invest with them, and we mitigate that, you know on our own account, and really try to work that such that, you know, we can aggregate property more in line with our financial structure, and then we will look at what are the best and appropriate capital market alternatives once we have aggregated some of those properties. Sometimes it makes sense to aggregate a portfolio of properties and if the marketplace gives you a premium for those, you go ahead and exit at that time. If it makes more sense to aggregate more assets and take it into a public vehicle, we clearly will consider that, but it's difficult to say at this time. We've got a look under each one of these initiatives, and look at the size that they can be, and look at the capital structure, and do what's appropriate for the marketplace. So it's a little difficult right now to say what we will do with them, but any of those alternatives are possible.

John, is it possible to give some semblance of the size of either one of those two projects in terms of assets, either the medical office or the warehouse, or the industrial properties?

It would probably be premature at this point to really indicate that. Once we have our capital alignment within there, we can give you much better insight to the overall scale that the partners believe is appropriate.

I agree with that, Bill. I think it will be premature to do that. But we are looking to do something that would be impactful.

Fair enough. Thank you much.

At this time, there are no further questions.

Okay. Well, given that, thank you all for joining us, and we'll talk to you at year-end.